The WSJ reported that Sun officials felt that IBM's offer of $9.40 a share or less was too low and that IBM had too much leeway to walk away from the deal, which could face substantial antitrust issues in the Unix server and mainframe storage markets.

The two sides could still work out a deal, but the Journal reported that Sun has sent a notice terminating IBM's agreement for exclusive negotiations, while IBM has withdrawn its offer to buy Sun. The two sides apparently remain in touch by phone, however.

Sun has made strides to reduce its losses and is in the middle of a restructuring to improve its financial position.

Sun ended 2008 with $2.64 billion in cash and $1.26 billion in debt, so it appears to have some time even with the difficult economy. The company burned through $113 million in the fourth quarter. It will release its first-quarter results on April 28, and at least one analyst firm  Wedge Partners  believes the quarter was a tough one for Sun.

But the near-merger could raise questions in customers' minds about Sun's viability and future that the company will need to address to reassure its customer base.

Sun shares have gained more than 60 percent since rumors of the takeover talks leaked, so they will likely be under some pressure when Wall Street opens for business on Monday. Neither side ever officially confirmed the talks. Sun is believed to have no other prospective suitors, as the company reportedly sought bids from other large IT companies after IBM expressed an interest but found no takers.

The Journal reported that Sun's board is split over the proposed deal, with Sun chairman and co-founder Scott McNealy leading the opposition, and CEO Jonathan Schwartz heading the side in favor of the merger.

Enterprise Strategy Group analyst Brian Babineau said the fallout reminded him of the failed merger negotiations between Microsoft (NASDAQ: MSFT) and Yahoo (NASDAQ: YHOO) a year ago.

"Sun is playing the role of Yahoo right now," Babineau said. "I can't imagine shareholders will be excited."

On the other hand, the deal's collapse could be good news for Sun OEM partners, such as Hitachi Data Systems (HDS) and Dot Hill (NASDAQ: HILL), and IBM partner NetApp (NASDAQ: NTAP), but NetApp also faces the uncertainty of a patent dispute with Sun over the ZFS file system. LSI (NYSE: LSI) is an OEM partner of both companies and thus would appear to be less affected either way, although Babineau pointed out that a merger could mean fewer SKUs for LSI to support and thus lower costs.